Why is responsible investment so important for Private Equity Houses?

Sustainability issues, or ‘responsible investment’ as it is also known to private equity firms, is having a significant impact on the performance of portfolio companies, their valuations and therefore, private equity investors and managers.

In our video, PwC Director Phil Case explains why it is so important, including the main drivers behind the responsible investment agenda for LPs and investors and when it should be considered during the deals cycle beyond the point of fundraising.

Investors are increasingly interested in environmental, social and governance (ESG) policies and programmes adopted by private equity firms, particularly at the point of fund-raising. They are, of course, keen to ensure that ESG risks are being well managed.  But they are also focusing their investment strategy around more ‘sustainable’ propositions as they acknowledge this is now seen as a source of competitive advantage, as well as having significant effects on returns. Furthermore, regulatory developments, such as the Modern Slavery Act, are impacting private equity houses as they must acknowledge the legitimate interests of wider stakeholder groups that are concerned with transparency and disclosure.

The issues

ESG issues should be considered at key stages of the lifecycle of a portfolio company to maximise value protection and creation. Considerations include:

On acquisition:

  • Understanding the impact on markets and industries of sustainability megatrends (e.g. climate change, demographics and water constraints).
  • Compliance with regulatory and voluntary schemes (e.g. CRC Scheme, The Modern Slavery Act and UN Principles for Responsible Investment).
  • Understanding the ESG-related risks and opportunities for the business’s product lifecycle.

During the hold period:

  • Improving ESG issue management to minimise risk/costs.
  • Reporting internally to inform governance, and externally for transparency.
  • Using ESG-related issues to generate value.

On exit:

  • Reflecting the value of ESG programmes in the exit price.
  • Evaluating and satisfying market and investor expectations of the company in relation to ESG issue management.

How we can support you

PwC provides a full range of sustainability-related services to address these issues. Our services include:

On acquisition:

  • Evaluation of sustainability megatrends, changing consumer behaviour, forthcoming regulation and government incentives.
  • Advice on risk appetite, investment policies and procedures for managing company impacts.
  • ESG due diligence.
  • Deal ESG risk screening guidelines and toolkits.

During the hold period:

  • Review of the whole portfolio to identify focal points for action.
  • Reviews and benchmarking of portfolio company operating practices and supply chains.
  • Guidance on reporting internally and externally on responsible investment.
  • Guidance on achieving efficient regulatory compliance.

On exit:

  • By helping you tell a compelling story about the value added by the PE House through ESG initiatives during the hold period.
  • IPO and public company readiness assessment and action plans in relation to ESG issues and standards.
  • Valuing ESG initiatives.